Treadway Companies, Inc. v. Care Corp.

FEINBERG, Chief Judge

(concurring in part and dissenting in part):

I concur in that part of the majority opinion that affirms the ruling of the district court that Care Corporation and Cowin did not violate any duty to Treadway. However, I dissent from the majority’s reversal of the ruling of the district court that the issuance and sale of shares to Fair Lanes was improper.

The majority states that the district court did not apply the “business judgment rule” to the Fair Lanes transaction. The majority then applies that rule, and concludes, contrary to the district court, that the transaction cannot be set aside. In reaching this conclusion, the majority argues that there is evidence in the record “that the directors did in fact exercise their independent judgment.” But that is not the question before this court. Rather, the question for us is whether the district court, in the face of some evidence of independent judgment and reasonable diligence, could find the contrary evidence to be more weighty, and could reasonably conclude that the outside directors did not exercise sufficiently independent judgment and reasonable diligence. On the record before us, I am not prepared to hold as a matter of law that the issue can only be decided one way.

For example, the district judge found that the two earlier proposed transactions with the same objective between Treadway and Fair Lanes had been prevented from occurring by disinterested third parties: The first was stopped by the American Stock Exchange, which refused to list the shares involved unless shareholder approval was secured; the second was blocked by the district court itself, which was highly suspicious of the haste, terms, and purposes of the transaction. In light of these findings, the district court may well have concluded, without saying so in explicit terms, that the outside directors were properly put on notice, by these aborted transactions, of the doubtful nature of Lieblich’s plans and motives, and that in acquiescing in the third transaction, they failed to exercise that degree of reasonable diligence and independent judgment that is always required of directors, and is a prerequisite to application of the business judgment rule. 1 Under *386 these circumstances, the furthest that I would go in the direction of the majority opinion would be to remand this case to the district court, with directions to reconsider the actions of the outside directors more fully and to state explicitly whether the business judgment rule applies, and if not, why not. 2

Even though I therefore cannot concur in the decision to insulate the Treadway-Fair Lanes transaction from judicial scrutiny, I am gratified that the majority is requiring a new election. The shareholders will thus gain the benefit of all the information regarding incumbent management and Care that was collected by the district court, which the majority rightly refers to as “material.”

. See 3A W. Fletcher, Cyclopedia of Private Corporations § 1039, at 38 (M. Wolf rev. 1975) (“[T]he so-called ‘business judgment rule’ does not conflict with the concept of negligence . . [Wjhen courts say that they will not interfere in matters of business judgment, it is *386 presupposed that judgment — reasonable diligence — lias in fact been exercised.”).

. Such a remand would also give the district court an opportunity to consider the question, first raised by the outside directors on appeal, whether they are properly held to a less strict standard of diligence and care than inside directors are.